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Does Lax Environmental Regulation Attract FDI when accounting for "third-country" effects?

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Author Info
Kukenova, Madina
Monteiro, Jose-Antonio

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Abstract

This paper investigates if differences in environmental regulations can influence FDI flows in a multi-country setting taking into account the so-called "third-country" effects. We examine bilateral FDI flows using a new extended OECD investment database which covers great number of host countries and a long sample period (1981-2005). The findings based on a spatial gravity-like model are largely plausible across specifications and confirm the existence of a negative relationship between FDI and environmental stringency, once we correct for endogeneity and spatial dependence. The evidence of a positive "third-country" effect for FDI suggests the prevalence of complex FDI from developed to developing countries. The spatial structure of the model allows also to underline the possible existence of competition in environmental standards between countries to attract FDI.

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File URL: http://mpra.ub.uni-muenchen.de/11321/
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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 11321.

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Date of creation: Apr 2008
Date of revision: Sep 2008
Handle: RePEc:pra:mprapa:11321

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Related research
Keywords: Complex FDI; Pollution Haven; Spatial Econometrics;

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Find related papers by JEL classification:
F18 - International Economics - - Trade - - - Trade and Environment
Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounting
C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
F1 - International Economics - - Trade
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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References listed on IDEAS
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  1. Brian R. Copeland & M. Scott Taylor, 2004. "Trade, Growth, and the Environment," Journal of Economic Literature, American Economic Association, vol. 42(1), pages 7-71, March. [Downloadable!] (restricted)
    Other versions:
  2. Dean, Judith M. & Lovely, Mary E. & Wang, Hua, 2005. "Are foreign investors attracted to weak environmental regulations? Evaluating the evidence from China," Policy Research Working Paper Series 3505, The World Bank. [Downloadable!]
  3. Bruce Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," Atlantic Economic Journal, International Atlantic Economic Society, vol. 33(4), pages 383-403, December. [Downloadable!] (restricted)
  4. Robert Hoffmann & Lee Chew Ging & Bala Ramasamy & Matthew Yeung, 2004. "FDI and Pollution: A Granger Causality Test using Panel Data," CEABuR Working Papers 2, Centre for Europe-Asia Business Research. [Downloadable!]
    Other versions:
  5. Robert J. R. Elliott & Kenichi Shimamoto, 2008. "Are ASEAN Countries Havens for Japanese Pollution-Intensive Industry?," The World Economy, Blackwell Publishing, vol. 31(2), pages 236-254, 02. [Downloadable!] (restricted)
  6. Cole, Matthew A. & Elliott, Robert J.R. & Shimamoto, Kenichi, 2005. "Why the grass is not always greener: the competing effects of environmental regulations and factor intensities on US specialization," Ecological Economics, Elsevier, vol. 54(1), pages 95-109, July. [Downloadable!] (restricted)
  7. Andreas Waldkirch & Munisamy Gopinath, 2008. "Pollution Control and Foreign Direct Investment in Mexico: An Industry-Level Analysis," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 41(3), pages 289-313, November. [Downloadable!] (restricted)
  8. Matthew A. Cole & Robert J. R. Elliott & Per G. Fredriksson, 2006. "Endogenous Pollution Havens: Does FDI Influence Environmental Regulations?," Scandinavian Journal of Economics, Blackwell Publishing, vol. 108(1), pages 157-178, 03. [Downloadable!] (restricted)
  9. Bruce A. Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," NBER Working Papers 11299, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Ronald B. Davies & Helen T. Naughton, 2003. "Cooperation in Environmental Policy: A Spatial Approach," University of Oregon Economics Department Working Papers 2006-18, University of Oregon Economics Department, revised 10 Jun 2003. [Downloadable!]
  11. Yeaple, Stephen Ross, 2003. "The complex integration strategies of multinationals and cross country dependencies in the structure of foreign direct investment," Journal of International Economics, Elsevier, vol. 60(2), pages 293-314, August. [Downloadable!] (restricted)
  12. List, John A. & Co, Catherine Y., 2000. "The Effects of Environmental Regulations on Foreign Direct Investment," Journal of Environmental Economics and Management, Elsevier, vol. 40(1), pages 1-20, July. [Downloadable!] (restricted)
  13. Matthew A. Cole & Robert J. R. Elliott, 2005. "FDI and the Capital Intensity of "Dirty" Sectors: A Missing Piece of the Pollution Haven Puzzle," Review of Development Economics, Blackwell Publishing, vol. 9(4), pages 530-548, November. [Downloadable!] (restricted)
  14. Josh Ederington & Arik Levinson & Jenny Minier, 2005. "Footloose and Pollution-Free," The Review of Economics and Statistics, MIT Press, vol. 87(1), pages 92-99, 01. [Downloadable!] (restricted)
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